September 2009
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Infra emerges as an asset class for long-term growth

Infrastructure, including roads, power, highways, airports, ports and railways, has emerged as an asset class with long-term growth that can provide relatively stable returns, said an Assocham-Ernst & Young survey on Private Equity in Indian Infrastructure: Strengthening the Nexus.

The joint study highlights that the global economic crisis has not dampened investor confidence in the sector. Last year’s crisis had limited or short-term impact on PE investments, and activities in the sector will pick up in the next 8-12 months, it said.

The survey points out that PE funds have already invested close to $2,694 million in the country’s infrastructure sector in the past three years.

“Since India is characterised by an underdeveloped and an undercapitalised infrastructure set-up, it needs significant impetus to accelerate growth. The government has identified this need and has already adopted an action plan, which calls for substantial infrastructure investment and heightened private sector participation in the coming years,” said Assocham Secretary General DS Rawat.

Despite challenges faced in the sector, numerous policy measures by the government coupled with significant capacity additions are expected to catalyze the investment potential in the sector and, as more private players enter the arena, the sector will evolve further and create attractive investment and exit opportunities for PE investors, said the survey.

According to the survey, a majority of the respondents believe in significant investment potential offered by the infrastructure sector in India.

In terms of investment attractiveness in the future, the joint study has ranked power as the most sought after segment among respondents for investment in the future (83%), followed by roads and highways (72%), ports and logistics (66%), rail (45%), airports (43%) and shipping (35%). An interesting segment identified as offering a strong growth potential was urban infrastructure, especially areas such as water management, waste water management, sewerage system and solid waste management.

“PE funds operating in India display a fair degree of preference for the power sector…Reforms such as improved tariff norms, open access to transmission networks and unbundling of state utilities are aimed at attracting greater private investments and participation,” said the survey.

This is also supported by data that the power sector witnessed maximum number of PE deals from global and domestic funds since 2006.” it added.

PE firms also identified certain hurdles. Delays in getting approvals and a complex regulatory environment hindered PE flows to the infrastructure sector, the survey said.

“Infrastructure projects typically involve a long payback period, whereas the debt is available for financing the project matures for 7-12 years. Meanwhile, regulatory procedures, delays in project implementation and several unplanned cost escalation create concerns regarding the financial viability of projects and disrupt the flow of investments by PE houses,” it said.

Source: Economic Times

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